The economy was damaged by the onerous terms of the Versailles peace settlement, compounded by the sluggish growth of world trade. Between 1919 and 1924 industrial production was running at between a half and three-quarters of the 1913 level.43 The situation improved in the second half of the 1920s after inflation had been brought under control and capital began to flow in from the US. But most of these funds were withdrawn when the world depression began to bite. With the banking system in crisis and the political parties unable to reconcile their differences, Germany was plunged into a period of political turbulence which culminated in the appointment of Hitler as Chancellor in 1933. Within the confines of a command economy a partial recovery took place in the second half of the decade, but economic efficiency took second place to the two overriding national objectives: military supremacy and industrial autarky.
The response of German industry to these events was defensive. The first priority after the war was to rebuild the industrial base. In heavy industries rationalisation through merger was seen as a means of cutting costs and reducing competition. Thyssen was the prime mover in the formation, in 1926, of a giant steel-making group, Vereinigte Stahlwerke (Vestag), which accounted for about half the industry’s output. This merger, partly financed by US capital, facilitated plant closures and led to some improvement in productivity, but Vestag was an unwieldy creature and difficult to manage effectively.44 In the chemical industry a process of consolidation, which had started before the war, led in 1925 to the creation of IG Farben, embracing all the leading dyestuffs companies. But rationalisation did little to improve the efficiency of German industry; one historian has described it as ‘simply a vogue-word used to describe the mistaken investments made in the 1920s’.45 It was accompanied by a further proliferation of cartels, some of which, as in steel, were extended internationally.
The stagnation of the inter-war years did not erase what had been achieved in Germany before 1914. Investment in skills through technical schools and universities was maintained, and the apprenticeship system was strengthened by the Nazis, albeit for political rather than economic reasons; factory-based training, part of a programme for building ‘works communities’, was a way of detaching workers from their loyalty to trade unions. While German engineering firms lost ground to the Americans in mass-produced lines – the Solingen cutlery-makers, for example, had nothing with which to counter the Gillette safety razor – they continued to be highly competitive in skill-intensive capital goods such as machine tools. IG Farben was the undisputed leader in the world chemical industry, spending more on research than its American and British competitors. But German manufacturers tended to continue along lines which had been set before the war, rather than develop new activities. There was a particular weakness, partly due to the instability of the economy, in consumer products.46 The electrical industry was slow to invest in the large-scale production of domestic appliances, and the motor industry, most of which was still attached to craft production methods, performed poorly until the second half of the 1930s.
For Britain the inter-war period was not as politically traumatic as in Germany, and the social strains arising from high unemployment were handled more successfully. But the war and its aftermath undermined many of the assumptions which had guided governments and entrepreneurs since the middle of the nineteenth century. The 1920s saw the collapse of the liberal world economic order on which British hegemony had been based. The attempt to restore the old order was responsible for what is often seen as a serious error – the return to the gold standard in 1925 at sterling’s pre-war exchange rate. Although this decision could be defended as a contribution to the revival of international trade, it weakened the competitiveness of British exporters at a time when overseas markets were contracting. Yet, whatever the merits of the return to gold, the British government on its own could have done little to halt the spread of protectionism. The one country which might have done so, the US, maintained its high tariff policy; the Hawley–Smoot Tariff of 1930 has been widely blamed for exacerbating the world depression. Britain’s own attachment to free trade finally gave way with the abandonment of the gold standard in 1931 and the introduction of a general tariff in the following year.
The collapse of world trade had a disastrous effect on Britain’s staple industries which had traditionally exported a large proportion of their production. After the brief post-war boom had faded, the cotton textile industry was faced with a huge surplus of capacity which persisted throughout the inter-war period. Some of its important Asian markets were invaded by Japanese textile exporters, and India was building up its own textile production. Cost reduction was the order of the day, but the one major attempt at reorganisation – the concentration of more than a hundred spinning mills in the Lancashire Cotton Corporation – did little to improve the industry’s competitiveness. The situation in shipbuilding was much the same. A surge in orders after the war, as owners replaced tonnage that had been damaged or destroyed, was followed by a prolonged slump. Some yards were closed in the 1930s as part of a capacity reduction programme co-ordinated by the Bank of England, but the adjustment was far from complete by the time of the Second World War.
The positive feature of the inter-war period was the progress made in newer industries. The four-way merger which created Imperial Chemical Industries (ICI) in 1926 was in part a defensive response to the formation of IG Farben in the previous year, but the new company was strongly committed to research. ICI’s invention of polythene in 1933 was the counterpart to Du Pont’s nylon, showing that in the new technology of polymer chemistry German firms no longer had the field to themselves. There was a partial recovery in electrical engineering and a promising start in the new field of electronics; television and radar were two innovations for which British engineers could claim most of the credit. In the motor industry British manufacturers were no match for Ford and General Motors in exports, but by European standards the two leading firms, Morris and Austin, did well, skilfully adapting Fordist techniques to the conditions of a much smaller home market.
There were improvements, too, in management and organisation. The formation of ICI was one of several large-scale mergers which took place in the inter-war period, and although not all of them were successful, these structural changes had a positive effect on managerial efficiency.47 The merger movement, and the increasing trend for large companies to raise capital on the London Stock Exchange, created opportunities for the merchant banks in the City of London (which were facing a dearth of overseas business) to strengthen their links with domestic industry. As companies got bigger and family control was diluted, more professional managers were appointed to senior executive posts. Some of them came into industry via the accountancy profession; the accountancy firms, in their role as auditors, provided their staff with a training in management which was a partial substitute for a business school education of the American type.48
TABLE 2.2 Manufacturing output per person employed 1899–1935
(Britain = 100)
| US/Britain | Germany/Britain | |
| 1899 | 195.4 | 94.7 |
| 1913 | 212.9 | 119.0 |
| 1925 | 234.2 | 95.2 |
| 1935 | 207.8 | 102.0 |
Source: S. N. Broadberry, The Productivity Race, Cambridge, 1997. p. 36.
Given the difficult international environment, British industrial performance in the inter-war years was creditable, at least in comparison with other European countries.49 As TABLE 2.2 shows, Germany and Britain were roughly on a par in terms of manufacturing productivity at the end of the 1930s, as they had been just before the First World War, and not far apart in their share of world manufacturing production (TABLE 2.3). The failure, if there was one, was in relation to the US, where productivity was more than double the European level. The American lead was based on a large, tariff-free home market, an abundance of raw materials, and institutions and policies which encouraged entrepreneurship and innovation.
TABLE 2.3 Shares of world manufacturing output, 1913 and 1938
(per centage of total)
| 1913 | 1938 | |
|
US
|